Paxum Ends Association with Bitcoin Exchanges

CYBERSPACE—In a GFY thread posted up Saturday, Paxum announced that starting immediately it would cease working with any companies using virtual currency Bitcoin. The decision had been forced upon the global e-wallet and money transfer service by its banking partners, the company said.

“This was not an overnight/impulsive choice,” posted Ruth Blair for Paxum. “We had been in discussions with our banking partners, Mastercard and our auditors for the last couple of weeks, and on Friday our banking partners ended the discussions with us and stated that it was too much of a potential risk to continue doing business with Bitcoin and Bitcoin Exchangers and instructed us to close all Bitcoin-related accounts. We had no choice but to follow those instructions and therefore, all Bitcoin associations were severed on Friday.”

Paxum did not use Bitcoin as a currency itself but did allow Bitcoin exchanges to use Paxum as one of their payout options. As of Friday, that option was no longer available to them.

According to Betabeat.com, Paxum started working with the exchanges about a year ago. “Paxum hooked up with leading Bitcoin exchange Mt. Gox in December 2010, major Bitcoin exchange Tradehill in July 2011, and more recently with BitInstant, a service that speeds up Bitcoin transactions by fronting customers the credit, and others,” reported Adrianne Jeffries for the site.

Though Paxum declined to state which banking partners had ordered a halt to any affiliation with Bitcoin, Blair said in the GFY post that “Paxum was not hacked by any Bitcoin user(s), and we have not encountered any fraudulent activity with Bitcoin and Bitcoin-related accounts.”

There was speculation in the immediate aftermath of the announcement that Canadian regulators were to blame.

“Paxum, Inc. is licensed and registered as an MSB (Money Servce Business) with main offices in Quebec, Canada,” wrote Jon Matonis on his blog, The Monetary Future. “Apparently, the MSB regulatory body in Canada, FINTRAC (Financial Transactions and Reports Analysis Centre of Canada), has decided to exert some soft pressure on e-wallet companies and their banks that facilitate bitcoin exchanges.

“As no court jurisdiction has ruled on whether bitcoin is actually money,” continued Matonis, “the regulators have decided to issue statements of guidance as to how bitcoin may or not be interpreted by the courts. The result of this has been to exert regulatory influence through warnings because the licensed money service businesses are being 'pre-warned' of potential legal issues ahead.”

But Paxum’s Blair also rejected that claim, telling Betabeat that there were no new government regulations prompting the change, and pointed to the exceptionally high risk nature of Bitcoin is the ostensible reason for the cut-off.

“The main fears [of Paxum’s banking partners] had to do with the fact that [Bitcoin is] a decentralized currency and as such there isn’t much control over it,” she said. “In the end, it is converted to a legal tender (generally USD), but it is unclear to them how this currency is supported and who pours actual money into it, and more importantly, why.”

A sign of Bitcoin’s growing use is reflected in the increased media attention it has been getting recently. On Jan. 27, Pc Pro published an article titled “Paying for your crimes with Bitcoin,” in which the author stated, “It’s become increasingly clear over only two years that Bitcoin is now the currency of choice for the discerning cybercriminal.”

Not a week later, Financial Edge posted an article titled, “Bitcoin May Be the Currency of the Future,” in which author outlined the reasons why virtual currencies are so attractive, but warned that in addition to the currency’s inherent volatility, “There's also the problem of trustworthiness. Although traditional or fiat currencies may not be based on an underlying asset like gold, they have an implied value due to their universal adoption. Bitcoins aren't backed by a hard asset or a large government, so there is no guarantee that bitcoins will hold any value in the future.”

That fluctuating value, as well as some other well-publicized problems, has plagued the virtual currency. According to a Jan. 17 article in New Scientist, “It has been a rocky year for Bitcoin, the online peer-to-peer currency, with the exchange rate soaring from a few cents to over $30 per coin before crashing after a string of thefts, hacks and other setbacks. Coins have since regained a value of around $5. But it is becoming clear that the software could prove at least as useful as the currency itself, underpinning a number of important new technologies.”

The new technologies are emblematic of the potential uses that digital currencies can play in the developing global online economy, for better or worse. One ancillary use is as a form of “carbon dating.”

Jacob Aron explained, “An individual's bitcoins are registered to one or more addresses, which are alphanumeric sequences that serve as the user's identity on the P2P network. When a transaction takes place, it is broadcast on the network, effectively creating a public record. The coded address keeps the user's identity anonymous.

“Clark and his colleague Aleksander Essex at the University of Waterloo, also in Ontario, realized they could convert a message—for example, a list of codes that securely link voters to their votes—into a Bitcoin address,” added Aron. “Sending a tiny fraction of a bitcoin—a small transaction—to that address would allow the holder of that list to store it in the public record without revealing its contents. When they later publish the message for verification, anyone can repeat the conversion to a Bitcoin address and confirm its age by checking the public record.”

Another system already in development utilizes Bitcoin to circumvent internet censorship. “Launched last year, [Namecoin] uses modified Bitcoin software to provide decentralized domain names for websites,” wrote Aron. “When you enter an address like newscientist.com into a browser, it consults a domain name system (DNS) server to find the site's numerical address. DNS servers are centrally controlled by the Internet Corporation for Assigned Names and Numbers; Namecoin offers a P2P alternative.

“This allows owners of ‘.bit’ domains to get around DNS restrictions such as those proposed in the US Stop Online Piracy Act (SOPA), which if passed into law would see copyright-infringing sites struck from the DNS record,” he concluded.

And last year, Ars Technia reported on malware that was targeting Bitcoin, warning, “In a report issued last week, Symantec researchers described a Trojan that uses the user's computer to mine Bitcoins on behalf of the intruder. They estimate that, at current exchange rates, a fast computer could generate as much as $150 worth of Bitcoins per month.”

Clearly, there are two sides to Bitcoin, which explains why it has and will continue to attract so much conflicted attention.

As far as Paxum’s decision goes, some impacted parties are still hoping that an accommodation can be found. In a post to a Bitcoin forum on Saturday, Charlie from BitInstant, one of the exchanges cut off by Paxum the day before, expressed his hope that the issue can still be worked out.

“Paxum and I have a few conference calls with their partners set up for this week and if all goes well, we can have this resolved and back online in 1-2 weeks,” he said, adding, “I just booked a flight to Paxum HQ in Canada for next week, and I hope to have it reinstated in the coming weeks.”

Whether such an accomodation is possible remains to be seen. Monday, as the Paxum news was still sinking in, Betabeat reported that Bitcoin exchange Tradehill had suspended trading, effective immediately, and would return all clients' funds. The reason reinforces the speculation that regulators have increased pressure on the sector.

"Due to increasing regulation TradeHill can not operate in its current capacity without proper money transmission licensing," said an announcement on the Tradehill blog. "Combined with multiple bank account closures and Paxum’s decision to close all Bitcoin business accounts, we have deemed the best course of action is to halt trading and pursue licensing while raising funds."